The next big theme is titled, “CVC, Toshiba and What’s Really Happening There.” CVC Capital Partners, a private equity firm, is using their Asian fund to make something in the range of a $20 billion dollar bid to take Toshiba. I’m not going to talk too much about the mechanics of the deal because it’s been covered very well by good publications like the Wall Street Journal, The New York Times and Nikkei Asia.
I want to explain the insight of why deals happen. A CEO has many different ways to manage a company. They can do a merger, break apart the company, do an asset optimization program, roll out a new strategy, undertake an operations review of the company, or do a share buyback. A CEO can do many different things.
We shouldn’t be looking at the mechanics of the private equity deal. We should ask ourselves, why did this CEO pick this option? What is it telling us? Let’s look at what we know about the deal. But before we do that, we need to remember one thing. In any MBA program, they teach us that the number one goal of a company, the CEO’s number one goal, is to protect shareholders and create the most wealth for shareholders. I’m not saying that’s right. I think companies need to spend more time focusing on workers and communities, but that’s what Milton Friedman has taught the world, and MBA students are indoctrinated in that.
But it isn’t true, and it’s a very easy thing to disprove. The number one thing CEOs are interested in is not in how to protect shareholders and increase their wealth. The number one thing CEOs are interested in is keeping their jobs. That’s human nature. If you want to get into a CEO or a leader’s psyche and understand why they do things, it’s to preserve their job.
Many CEOs have undertaken bad decisions and strategies simply to keep their jobs. If this isn’t true, then somehow we’ve created a world where the rest of the world is a little bit selfish and behave driven by self-interest, but CEOs are paragons of moral rectitude—and that can’t be true. So, the question becomes, why would the CEO do this? Well, what do we know about Toshiba? We know that the former head of CVC Capital Japan is now the head of Toshiba. There’s nothing wrong with that—private equity fund managers are obviously incredibly talented people with deep knowledge of the country’s regulation in certain sectors, so it makes sense that they would sometimes move back into industry.
At the same time, we know that the company has had a pretty difficult time in the last few years. They’ve faced activist shareholder pressure. They’ve had problems with accounting issues. I’m not going to say whether it’s right or wrong, but they’ve had accounting issues, which has led to shares almost being delisted. They almost went bankrupt two years ago.
On top of that, Toshiba has a large nuclear division. Given how important that is to the Japanese economy, whichever company buys Toshiba —which would be one of the largest private equity deals if it goes through—would need to get government approval. On top of that, the way private equity firms work is that each firm has a fund, and they use that fund to make a deal. It’s not as if all of CVC Capital’s entire balance sheet can be brought to the table. Whichever fund they have allocated to Japan needs to do the deal. Maybe it can take money from another fund they have, but I’m pretty sure there are rules around how much money can be transferred out of a fund, and I don’t think they could do too much of that.
Now, given all of this, we could argue that the deal—which seems very unlikely—could be a way to draw attention away from the difficulties Toshiba is going through. If it’s drawing attention away from the difficulties so management can focus on things, and if the deal is right for Toshiba, there’s nothing wrong with that. It’s common practice. When a management team is under crisis or is distracted by unnecessary noise, it’s encouraged for them to bring their attention back to what is important. If this is a way to do that and reset the conversation, which shareholders would regulate, then it’s a good thing for Toshiba.
But we have to remember that at the end of the day, many leaders do what’s good for them. I don’t know the CEO of Toshiba. I’m going to assume he’s a good guy, and he knows that this is good for the company. But as we look at the deal, don’t just look at the mechanics of the deal. Look at why the deal is happening and if it’s good for Toshiba—and the only people who would know that are the shareholders who follow Toshiba very closely. The Japanese government obviously has a big say in this, and of course the CEO and the private equity firm. Let’s hope they’re making the right decision.
This is an excerpt from Monday Morning 8 a.m. newsletter, issue #25. Many of you have found Monday Morning 8 a.m. so useful that you’ve asked us to release a book version of these newsletters. We’ve obliged and released a Kindle version, which you can find on Amazon under “Strategy Insights.” It contains the insights from previous Monday Morning 8 a.m. issues, edited into a bite-sized format that’s very easy to use. And you can learn about other FIRMSconsulting books here.
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